What a tracking fund promises
An index fund promises one thing: to hold what the index holds, in the proportions the index holds it. Not to beat it, not to avoid its worst constituent — to copy it, as closely and as cheaply as possible.
That promise removes judgement deliberately. If a company's weight in the index is 0.4%, then 0.4% of the fund goes into it, whatever anyone thinks of the business. If the weight changes, the fund must trade to match — not because anything was learnt, but because the arithmetic moved.
Move the weight, watch the buying
Nothing here is a decision about the company. Drag the weight and the money follows on its own.
Drag to zero — removal from an index forces every tracking fund to sell its entire holding, however good the company is.
A price can move a long way on flows that contain no opinion at all.
Why this changes how you read a chart
When a company enters a major index, tracking funds must buy it — all of them, over a defined window, regardless of price. The buying is mechanical, sizeable, and entirely predictable to anyone reading the index rules.
Beginners see the resulting rise and conclude that something good was discovered. Frequently nothing was discovered. A committee changed a list, and money that follows lists moved.
The same runs in reverse. A stock removed from an index is sold by every fund tracking it, which can look exactly like the market passing judgement on the business while being nothing of the sort.
The part that is genuinely good for you
None of this makes index funds a bad thing — quite the opposite, and this course returns to them properly in Part 01.06. Copying an index cheaply has served ordinary investors extremely well, precisely because it removes the judgement that most people, professional or not, exercise poorly.
The point here is narrower. A growing share of daily buying and selling carries no information about any company. Reading intent into every price move means reading intent into a machine following a list.
A company is added to a large index and its price jumps 8% that week. What is the safest reading?
Retail, promoters, market makers, index funds. All of them meet in the same place, on the same screen, at the same number.